Businesses Can Still Claim the Employee Retention Tax Credit (ERTC) Retroactively
Even though the Employee Retention Tax Credit (ERTC) is scheduled to end on December 31, 2021, eligible businesses who have yet to claim the tax credit still have time to do so.
While the program only covers employment taxes and employee wages paid through the end of 2021, a business can claim the tax credit by filing an amended payroll tax return before the statute of limitations to do so expires. Generally, this deadline falls three years after the original return is filed or two years from the date the tax was paid. This means that employers who are eligible to receive the ERTC will not miss out if they do not claim the credit before the program ends or have yet to claim credit for past qualifying wages.
What Is the Employee Retention Tax Credit (ERTC)?
The Employee Retention Tax Credit (ERTC), also called the Employee Retention Credit (ERC), was created by the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law in March 2020. The goal of the tax credit was to help businesses keep paying workers during the economic recession caused by the COVID-19 pandemic.
After the CARES Act, additional legislation expanded access to the ERTC. In December 2020, Congress passed the Consolidated Appropriations Act (CAA), which extended the credit’s availability from the original deadline. Then, in March of 2021, the American Rescue Plan Act (ARPA) moved the end date back again and modified ERTC requirements to allow businesses that obtained a Paycheck Protection Program (PPP) loan to claim the ERTC as well.
What Does the ERTC Do?
The ERTC is credited against certain employment taxes and applies to wages that were paid or earned between March 13, 2020, and December 31, 2021. Employers can receive 70% of the qualified wages that an eligible business pays employees throughout 2021, which is an increase from the 50% credit allowed for 2020. However, the credit is capped at $10,000 of qualified wages ($7,000 credit) per employee each quarter. Employer-provided healthcare benefits can also be counted as qualified wages for the purposes of the ERTC.
What Are “Qualified Wages”?
In general, for businesses that employ over 100 full-time employees, “qualified wages” are limited to payments made to employees for the time they were not working due to COVID-19. However, businesses with 100 or fewer full-time employees can count all employee wages as qualified, regardless of whether the employees are providing services or staying home. The ARA also created an exception that allows “severely financially distressed employers” with over 100 employees to count all wages as qualified for the third and fourth quarters of 2021.
What Is an “Eligible Employer?”
For a business or tax-exempt organization to be eligible for the ERTC, it must have experienced one of several coronavirus-related negative impacts.
Businesses that experienced complete or partial shutdown due to a COVID-19-related government order, restricting their ability to operate in 2020 or 2021 are eligible to receive the credit
Employers that experienced an over-50% decline in gross receipts between 2020 and the same quarter in 2019 can also claim the credit, as can businesses that experienced more than 20% of receipts decline in 2021 compared to the same quarter in 2019; If a business did not exist in 2019, it can use a comparable quarter from 2020 to establish eligibility
“Recovery startup” businesses that were launched after February 15, 2020, are also eligible for up to $50,000 of quarterly ERTC credits if their average annual gross receipts are $1 million or less; This category of eligible employer was not included in the original ERTC, but was added to the definition by the ARA
Claim the Credit ASAP to Avoid Delays
While employers can claim the ERTC until the end of the statute of limitations for filing an amended tax return, they should do so as soon as possible to avoid substantial delays in receiving their refund. The IRS is currently experiencing a significant processing backlog, so businesses should take advantage of the credit as soon as they are able to do so.